Dilma’s Fading Fortunes Boost Brazil’s Stock Market

By Johanna Bennett

News today that Brazilian President Dilma Rousseff lost ground in yet another poll has added to speculation that she will struggle to win the presidential election slated for October.

Her misfortunes, however, fuel gains for the Bovespa Index. Brazil’s stock market has climbed 15% during the past month despite a credit downgrade from Standard & Poor’s. In fact, the Bovespa has climbed each time the incumbent’s approval rating has taken a hit.

Often times, political uncertainty can unsettle a market. And some think a new government may usher in reforms to improve Brazil’s worsening economy.

In Rousseff’s first term, Brazil fell into stagflation and the equity market fell by nearly half. And opposition is growing to her populist policies, such as capping fuel prices that the state-controlled, loss-making Petroleo Brasileiro (PBR) can charge.

Averaging 2%, Brazil’s GDP growth has been the weakest under any president since Fernando Collor de Mello, according to Capital Economics. Yet inflation hasn’t fallen, sitting at 6.1%. Brazil’s account deficit has widened sharply, leading to a bigger budget deficit and more private sector debt.

Bringing all of this together, expectations at the start of President Rousseff’s term in office that Brazil was primed for take-off have proven to be well wide of the mark. Economic growth under Dilma has been weaker than under any president since the early 1990s. At the same time, inflation has remained stubbornly high, the current account and budget deficits have widened and the economy appears to have developed a dangerous reliance on credit to sustain demand….The result is that Dilma’s first term in office is likely to remembered as one in which Brazil’s star faded. Assuming she triumphs in October, reviving the economy’s fortunes during a second term administration will depend on Dilma’s ability to push through the reforms that have been shirked over the past four years.

But hope is rising. The U.S.-listed ADRs for Petrobras have climbed 29% over the past month, while share of Centrais Eletricas Brasileiras (EBR) have climbed 71% during the same span.

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APRIL 8, 2014 3:58 P.M.

Mikefromglenridgenj wrote:

I am married to a Brazilian and visit Brazil at least once a year. My impression of Brazilians is that as disappointed as they are with Dilma, that does not mean they are going to abandon her or the Lula's Worker's Party (and they still love Lula and her loves and supports Dilma). I think she will get reelected.

APRIL 9, 2014 3:11 P.M.

Anonymous wrote:

I am a resident of Brazil. At least in Rio de Janeiro, Dilma is an increasingly unpopular figure, and it is unusual to hear any support for her from any quarter (excepting government employees). Still, there seems to be a recognition that despite her lack of popularity, that she is still favored to win re-election, if only because there do not appear to be any viable opponents outside of the PT, and also because she is guaranteed the votes of the ever increasing number of government employees, and people getting welfare. If Brazil could have another free market President along the lines of Fernando Henrique, who could continue the privatization of large quasi-public entities, Brazil's economic growth would be tremendous.

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Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.